By Marianne Stigset and Anthony DiPaola

Sept. 23 (Bloomberg) -- DNO International ASA’s suspension from producing oil in Iraq highlights the risks for explorers seeking to tap the world’s third-largest reserves.

The Kurdistan regional government shut down operations at Oslo-based DNO, the first foreign company to pump crude in Iraq since the 1970s, for as many as six weeks after its role in a share transaction was disclosed by the Oslo exchange amid an investigation of the deal. The government said on Sept. 21 that DNO must act to repair the damage to its reputation after it was fined by the bourse for a delay in providing information.

The DNO dispute “raises some concerns on investments in the region,” said Al Stanton, an RBC Capital Markets analyst with a “sector perform” rating on the company. “It has again highlighted the uncertainty associated with the fiscal and legal terms and that is a worry for us.”

Disagreement between regions and sectarian groups has delayed a nationwide oil law in Iraq, even as officials are attempting to attract producers such as Exxon Mobil Corp. to bid on licenses and increase production after almost two decades of sanctions and war. DNO started exports in June from the semi- autonomous region, five years after signing an agreement.

The Kurdish area signed production-sharing agreements with companies such as DNO and Addax Petroleum Corp. on its own, accords deemed invalid by Iraq’s federal government based in Baghdad. While exports began in June, there hasn’t been agreement on payment terms. Shipments from the region are made through Iraq’s State Oil Marketing Organization and revenue is deposited with the central treasury.

Oil Law

“We don’t know how it will impact results as we don’t know how long production is going to be shut down,” Mark Edwards, a London-based spokesman for DNO, said by phone yesterday.

Iraq has drafted a national oil law to regulate foreign companies’ rights and obligations and split crude revenue throughout the country’s different groups. The measure has been held up in parliament before January’s scheduled elections as the nation struggles with output six years after the U.S.-led invasion ousted former dictator Saddam Hussein.

Iraq awarded just one out of eight service contracts offered during a bidding round for licenses in June and plans a second round before the end of the year to attract the investors and technology. Companies like Exxon and Royal Dutch Shell Plc balked at accepting to work for field service fees the Iraqi government said it was willing to pay that were less than half what the producers proposed.

What’s Offered?

The world’s top 10 non-state oil producers, including Exxon and Shell, are qualified to bid in the second round. All but one of them made offers for fields in the first tender, which only attracted one successful bid, from BP Plc and China National Petroleum Corp.

StatoilHydro ASA, Norway’s biggest oil and gas producer which is pre-qualified for the second round, yesterday said it was monitoring the DNO situation.

“We’re still in the process of looking at what’s being offered in the second licensing round, and in that context there are a number of important things for us to assess, such as economy, safety, ethics and the political situation,” Mari Dotterud, a StatoilHydro spokeswoman said. “We monitor the events closely and continuously reassess.”

BP and Exxon declined to comment on their plans in the country while a Shell spokeswoman said the company, based in The Hague, remains interested in opportunities to work in Iraq and is reviewing the situation regarding the next licensing round.

Bid Qualification

About 45 companies are qualified to bid in the second round, giving them a shot at a stake in the long-term potential held by the country’s 115 billion barrels of reserves. Iraqi Oil Minister Hussain al-Shahristani said the country aims to boost production to about 6 million barrels a day by 2015, from about 2.5 million barrels a day. Saudi Arabia, the world’s biggest oil exporter, produces 8 million barrels a day.

Oil producers such as Exxon and Shell have avoided the Kurdish region because the central government said it would exclude any firms signing deals there from bidding elsewhere, according to Muhammad-Ali Zainy, a senior energy analyst at the Centre for Global Energy Studies in London. “Not having an oil law is a big drawback,” he said.

DNO estimated sales of 129 million kroner ($22 million) in the second quarter from Iraq. There’s no timeline for when it will get paid, Chief Executive Officer Helge Eide said on Sept. 2. DNO delivers 45,000 barrels a day from its Tawke field through a pipeline to Turkey. It owns 55 percent of the field, which has reserves of 150 million to 370 million barrels.

Operations Halted

The Kurdistan Ministry of Natural Resources in a Sept. 21 letter informed DNO its operations would be halted for a maximum of six weeks and said it needs to “remedy, and to our full satisfaction, the damage done to the KRG reputation and for once and all to sort its internal problems” with the exchange. DNO would not be entitled “to any economic interest” during the suspension, the authority said.

The exchange last week disclosed that the authority acted as a middleman in a transaction of 43 million shares of DNO in October last year, a role DNO had sought to keep undisclosed. The exchange urged the company to disclose the contacts between Kurdistan Natural Resource Minister Ashti Hawrami and DNO’s Eide regarding the transaction.

The Kurdistan government said it got involved to help DNO with capital and that no officials benefited. The bourse started the probe after DNO sold shares to an undisclosed buyer. DNO has said it “will explore all options available to protect the interests of DNO shareholders.”

No Benefits

The Oslo Stock Exchange said after the close of the market today that it is ending the suspension of DNO’s stock and bonds. DNO hasn’t traded since Sept. 21.

“It’s hard to see exactly where this is going to go,” said Samuel Ciszuk, an energy analyst at IHS Global Insight in London. “It’s problematic for the KRG if they throw them out because they would probably undermine how people see the security of doing business in Iraqi Kurdistan. They would be as much of a loser as DNO.”

The start of exports in June sparked a surge of interest in the area. Heritage Oil Ltd. entered into a memorandum of understanding to combine with Turkey’s Genel Energy International Ltd. for 1.52 billion pounds ($2.5 billion) on June 9, a move which would create the region’s biggest producer.

Two weeks later, China Petrochemical Corp., China’s second- largest oil company, agreed to buy Geneva-based Addax Petroleum Corp. Other companies operating in the region include Gulf Keystone Petroleum Ltd. and Vast Exploration Inc.

Sterling Well

Talisman Chief Executive Officer John Manzoni said on Sept. 8 that the company is waiting to expand projects in Kurdistan until there is a settlement between the Iraqi central government and the Kurdish authorities.

Sterling Energy Plc, a London-listed explorer, said today it’s preparing its first exploration well on the Sangaw North block in Kurdistan in the fourth quarter, noting success rates for recent such drilling in Kurdistan are about 50 percent.

The potential reward of large finds in Iraqi Kurdistan makes the risk worthwhile for the smaller companies like DNO operating there, IHS’s Ciszuk said.

“If they start getting paid, they’ve made a very good deal,” Ciszuk said. The opportunity for a find that could add 100,000 to 150,000 barrels of output a day for one of these companies could be “a game changer.”

To contact the reporters on this story: Marianne Stigset in Oslo at mstigset@bloomberg.net; Anthony DiPaola in Dubai at adipaola@bloomberg.net

Kurdistan Oil Spat With DNO Signals New Risk in Iraq -  Source